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Coins, Tokens & NFT's

The Theory of Money​

Money is in fact anything which generally functions as a medium of exchange. From an economist point of view, money is classified in two broad groups: commodity money and token money.

 

In this section we will turn our focus towards cryptocurrencies, tokens and why blockchain and smart contracts have the potential to change our banking, stock exchange and other funding mechanisms.

Let us start our discussion with the age-old theory of money.

Barter is a trade system in which participants in a transaction directly exchange an section (goods or services) for other sections (goods or services) without a medium of exchange (such as money) [1]. Barter features immediate reciprocal exchange, not delayed in time. A seller of an section must not only find someone who is willing to give value for it but someone who is also willing to give in exchange some section which the seller wishes to acquire [2]. Alternatively, the seller must arrange a multilateral series of barter transactions having the same final result. This is called the "double coincidence" problem in a barter economy. The opportunity for exchange is severely restricted, which makes it almost impossible for a complex exchange economy.

Everyone who has ever played Settlers of Catan will recognise this problem when someone wants to trade a sheep for lumber and no one wants it, or that one guy who wants four ores for a brick.

Through introducing a common medium of exchange (money), in which a single transaction of barter (trade) becomes decomposed into separate transactions of sale and purchase, eliminate the double coincidence problem.

Money also separates the transactions in time (allows you to defer consumption until a later date [5]), and acts as a store of value [2], and its acceptability in settlement of debt. Money is also a unit of account, meaning that it allows you to assign a value to different goods without having to compare them [5]. Money is in fact anything which generally functions as a medium of exchange [2].

From an economist point of view, money is classified in two broad groups: commodity money and token money. (We are still talking about ‘normal’ money that we all use daily, and not about anything related to cryptocurrencies and tokens – witch we will get to)

Commodity Money​

Commodity money is money whose value comes from a commodity of which it is made (gold or silver). Commodity money consists of objects having value or use in and of themselves as well as their value in buying goods.

Token Money​

This is representative money (token money), which has little or no intrinsic value but represents something of value.

Token money does not need to take a physical form at all. In our modern economy, payments are mostly made by means of entries in bank ledgers. In this case payments are made not by the transfer of some physical entity, but by the alteration of a financial relationship. A credit card is not money; it is simply an order to transfer money; only the deposit in the bank itself is money.

Another form of token money is utility tokens. These tokens limit their use to the respective platform. Banks, airlines and retails often have ‘rewards’ programs that allow you to collect their respective "token". Each of these tokens have a value within a particular platform or brand and can be used to get a discount, a free coffee, an entry into an airport lounge or access to certain services based on the amount of tokens you have. Some of these tokens can even be paid out in cash. That’s a wrap on the Theory of Money. We did a quick history lesson on ancient trade through bartering, and why money was introduced – initially as commodity money and later also as token money.

A good place to start is to differentiate between Fiat currencies and crypto currencies. You might not have heard about Fiat currencies before, but this is the name for the money you use every day.

Think of the previous section as a leisurely cruise to familiarize yourself with the bay. In this we will be heading further out into the unfamiliar territory of cryptocurrencies and crypto-tokens. Life-jackets are located under your seat.

Fiat Currencies​

A good place to start is to differentiate between Fiat currencies and crypto currencies. You might not have heard about Fiat currencies before, but this is the name for the money you use every day. Dollars, Pounds and Euros (and the currencies of every other country) are all fiat currencies, which means that they only have value because it has been established as money by the issuing government, and nothing more. Fiat currencies are sanctioned by law as a means to pay for taxes and clearing debt, and is therefore also known as legal money.

Since our current usage of money is based on the belief that money needs to be backed by something "solid" like the gold standard, we must remind ourselves that money is a social creation. It is a tool that can be used well or poorly. Money isn’t a thing as much as it is a process [5]. Money is very useful when dealing with people you don’t know [4]. Money allows you to participate in the market in which it is accepted. When it comes to money, we need to consider the following [5]; firstly, for anything to be a medium of exchange, it has to be limited in supply. No one would give up a section into which effort of productions has been put into, by exchanging it for something like stones, which can be acquired through picking them up off the ground.

Secondly, it has to be durable to store value. Thirdly, it needs to be convenient in the sense that a unit of exchange needs to be sufficiently high enough in value, not to require vast quantities for the settlement of normal transactions

Cryptocurrencies and crypto-tokens​

Cryptocurrencies and crypto-tokens can essentially be viewed in the same way as commodity money and traditional token money. Cryptocurrencies derive their value through similar mechanisms to fiat currencies, with the main difference being that cryptocurrencies are native to the digital world rather than a particular country or region.

Cryptocurrencies can be divided into two subcategories - coins and tokens. A coin operates on its own blockchain (Bitcoin, ETH, EOS, Telos) where all transactions occur.

Tokens​

Crypto-tokens can take many forms, just as our everyday token money and utility tokens do. Tokens are crypto-digital assets that can achieve low-cost or even zero-cost transactions. Crypto-tokens can be representative of their native cryptocurrencies or fiat money, which lives on a blockchain [6]. There are also asset-backed tokens and utility tokens that are crypto-graphical representations of traditional assets such as equity, gold or shares [6].

A token works on top of an existing blockchain infrastructure, used on specific platforms. The primary use for tokens is a security token offering (STO), which helps projects and startups fund operations through a crowd-scale. Tokens integrate the attributes of equity (value-added, long-term income), property (representing the right to use, goods or services) and currency (circulating within a certain range).

Phew! We hope you’ve kept your wits about amid a very technical journey. This may seem daunting, or tough to navigate, like the ocean, but you can conquer it. Essentially we can agree that cryptocurrencies and crypto-tokens are surprisingly similar to our local money we use every day. Cryptocurrencies gain their value by many of the same means as local currencies do, and crypto-tokens can be used as payment tokens, functional tokens or asset tokens.

NFTs address the need for scarcity, uniqueness and proof of ownership in an increasingly digital market where most digital items can be replicated or sold infinitely. By contrast, NFTs tokenise digital or real world assets and this token can only be owned by one person at a time.

We’ve reached the final stretch on topic number 8, and this one has been rising in renown over the past few years. You may have encountered a lot of hype on social media regarding NFTs. In this instalment of our series we will be showing you the ropes in terms of the use and functioning of an NFT (non-fungible token).

In the previous section we introduced crypto-tokens as digital assets that can be used as payment tokens, functional tokens or asset tokens.

Most of our cryptocurrencies or tokens are referred to as fungible (they can be traded or exchanged, one for another) [7]. One Bitcoin is always equal in value to another Bitcoin. This property of fungibility of cryptocurrencies make it suitable for use as a secure medium of transaction in the digital economy [7].

While most cryptocurrencies and tokens are fungible (interchangeable/exchangeable), there’s a certain type of crypto-token that is non-fungible (not interchangeable/exchangeable). We at Yknot Blockchain Solutions like to think of an NFT as ‘your unique ticket to board’. If you were to book a trip on a boat, your ticket would be 100% unique – it is stamped with a specific date and time, your name, and your seat or cabin number. No two tickets are the same. You would never be able to purchase a second ticket that is exactly the same as the first, some of the identifiers have to be different in order for the register to work.

NFTs address the need for scarcity, uniqueness and proof of ownership in an increasingly digital market where most digital items can be replicated or sold infinitely. By contrast, NFTs tokenise digital or real world assets and this token can only be owned by one person at a time. Ownership is securely recorded with a digital signature on the Telos blockchain. NFTs are also used as a unique ‘ticket’ to participate in a DAO or other closed group.

Not all NFTs give you entry into something (like a ticket), but some do. The main point we are trying to bring across is that an NFT is unique and one-of-a-kind, which is what makes it so precious.

How do NFTs work​

NFTs are cryptographic assets stored on a blockchain with unique identifiers. Each NFT is unique and distinct from another, making them irreplaceable. These NFT cannot be traded or exchanged at equivalency [7]. NFTs facilitate a change in ownership of a physical asset using blockchain. In 2017, CryptoKitties took the world by storm (world’s first blockchain game) in which you could buy and breed a digital cat. Each new cat is a NFT and can be collected. It cannot be replicated, taken away or destroyed. (See cryptokitties.co for more details). The success of CryptoKitties paved the way for NFT to be used for a whole range of other possibilities.

NFTs in Property​

In a previous section we explained in detail how the ownership of a property can be stored on a blockchain. The blockchain keeps track of the purchase history. The actual property can be represented as a NFT. The property can be traded using the NFT to someone else. We can view the NFT as the digital representation of a title-deed in this case. The holder of the NFT is the rightful owner of the physical property, and this is all backed up by the blockchain ledger.

Other uses of NFTs​

Another example of NFT is its application in the domain of artwork. A painting can be represented as an NFT. It can only be owned by one party, and it is unlike any other artwork. The technology of NFTs is also used as a means of identifying people within an organisation or broader community. Since each NFT is unique, it can represent a person with an identification number or it can act as a digital passport. Each NFT can be encoded with additional metadata such as country of origin, department, or role within an organisation.

Just like blockchain, NFTs can either be applied in a public space or it can be applied in a more private (permissioned) environment within a corporation or organisation. The possibilities are endless. For more on NFT see [7], [8].

We hope you have found this section useful towards understanding the multiple uses of NFTs (even slightly) better.

References​

[1] "Barter - Wikipedia", En.wikipedia.org, 2021. [Online]. Available: https://en.wikipedia.org/wiki/Barter. [Accessed: 22- Jun- 2021].

[2] W. Newlyn and R. Bootle, Theory of Money, 3rd ed. Oxford: Clarendon Pr., 1978, pp. 1-18.

[3] J. Surowiecki, "A Brief History of Money", IEEE Spectrum: Technology, Engineering, and Science News, 2012. [Online]. Available: https://spectrum.ieee.org/at-work/innovation/a-brief-history-of-money. [Accessed: 06- Jul- 2021].

[4] L. Fourn, "A Brief History of Ledgers", Unraveling the Ouroboros, 2018. [Online]. Available: https://medium.com/unraveling-the-ouroboros/a-brief-history-of-ledgers-b6ab84a7ff41. [Accessed: 06- Jul- 2021].

[5] Redka, M., 2021. The Future of Blockchain: Potential Use and Global Impact. [Online] Mlsdev.com. Available at: https://mlsdev.com/blog/the-future-of-the-blockchain-technology-use-cases-geographical-expansion-potential-risks-and-challenges [Accessed 22 June 2021].

[6] B. J. Drasch, G. Fridgen, T. Manner-Romberg, F. M. Nolting, and S. Radszuwill, “The token’s secret: the two-faced financial incentive of the token economy,” Electronic Markets, vol. 30, no. 3, pp. 557–567, Mar. 2020.

[7] R. Sharma, "Non-Fungible Token (NFT)", Investopedia, 2021. [Online]. Available: https://www.investopedia.com/non-fungible-tokens-nft-5115211. [Accessed: 19- Jul- 2021].

[8] "Non-fungible tokens (NFT) | ethereum.org", ethereum.org, 2021. [Online]. Available: https://ethereum.org/en/nft/. [Accessed: 19- Jul- 2021].